Twitter's Upside Potential

Twitter, Inc. (NYSE: TWTR) will release financial results for the fourth quarter and fiscal year 2014 on February 5, 2015, after market close. On the same day, Twitter will hold a conference call to discuss these financial results.

With all those social networks, is Twitter’s growth matured? Or is there still ‘room for improvement’? Within this article multiple growth drivers, strategies, and risks will be outlined to the reader.

What to expect of Twitter for 2015?

Although Twitter’s product launch cadence over the next 12 months will be heavier than it's ever been in the past, the company still has significant ‘room to improve’. Last year the company has outlined various product initiatives to drive stronger Monthly Active Users (MAU) growth.

There are several factors, which can drive monetization upside:

1. Higher ad load. Twitter noted its ad load was 1.3% and that increasing ad load to 5% – in-line with industry peers – could drive an incremental $5B in annualized revenue. The company expects to grow ad demand by innovating on ad formats, increasing the size of its advertiser base (60k in 3Q14) and growing its sales presence.

2. MAU growth. Twitter laid out potential MAU growth of 19% per year over the next 5 years, potentially reaching 560M MAUs by 2018. This increase in MAUs, combined with higher ad load could drive an incremental $4.6B in annualized revenue over the next several years.

3. Higher engagement. Twitter’s main measure of user engagement is Timeline Views per MAU (TV/MAU). In Q3:14, Twitter recorded 636 TV/MAUs, which were down 7% Y/Y, a slightly worse result than the Street expected. Higher user engagement could drive an incremental $0.5B on an annualized basis.

4. Monetizing logged-out users. Twitter has ~500M logged-out users and it is focused on growing this base of consumption-first users. If Twitter were to monetize logged out users at ~$2.50 per user (half the rate of logged-in users), the company could potentially generate an incremental ~$1.3B in annualized revenue over the next several years.

Twitter is a unique, highly differentiated asset, and we remain positive on improving MAU growth, increasing monetization, and driving margin expansion – J.P. Morgan

While You Were Away

End of December Twitter rolled out the While You Were Away feature which populates a handful of the most relevant tweets a user may have missed followed by a real-time experience. This enhancement could increase relevancy for users that can not log into Twitter very frequently, providing them with the most important content when they sign in.

Mobile-optimized video ads

Twitter introduced Promoted Video ads within the Twitter Amplify program in 3Q14 and it can be expected that Twitter has the potential to turn itself into a more formidable video advertising competitor over the next few years. Mobile video advertising is still in early stages of development. It is expected that click through rates and conversion will improve as the mobile video ad market matures.

Another positive note

Twitter has historically not allowed search engines to crawl its pages, but the company is now letting Google crawl its top 50K hashtags, which has resulted in significant user growth and Twitter may increase the number of hashtags available to search engines in the future.

Instagram vs. Twitter

In early December Instagram surpassed Twitter, in terms of monthly users. Is Instagram therefore more valuable than Twitter?

So is Instagram larger than Twitter? No — it’s different than Twitter. One is largely private, the other largely public. One focuses on photos, the other on ideas. They’re both very large, and they’re both growing – Ev Williams

Twitter is uniquely positioned as the real-time broadcast and communications network. From my perspective, Twitter is fundamentally changing the way people communicate and consume information, and the company is still in its’ early stages of monetization. These characteristics help make Twitter uniquely complementary to all other forms of media, including TV. 

Top Risks

  1. 1. Increasing competition for mobile and native ad dollars, particularly with Facebook and Google, among others. 
  2. 2. Slower-than-expected user growth could increase concerns about scale and reach;
  3. 3. International monetization could lag more than expected.

A First Signal?

During the end of 2013 Twitter’s share price outpaced the consensus price target of analysts. When we look at the current consensus price target, Twitter can be considered undervalued.

Besides large upside price targets, the amount of analyst downgrades has decreased significantly, which could be a first signal that the stock could trade higher.

Conclusion

In a nutshell, at current valuations Twitter offers a good risk/reward profile for investors. New product initiatives make me feel confident about the company’s ability to grow users over a longer time-frame. Therefore, my 2015 year-end price target for Twitter is $55. Although the risk of competitors cannot be neglected, I am firmly positive about the company’s strategies to improve monetization. The step out of the company’s comfort zone, might bring along risks but also generates a lot of new opportunities for Twitter.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Ivo.furda

Ivo Furda

Main interests of Furda are macro­economic developments and trends.

This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.

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